Tuesday, June 4, 2013

If the carry trade ends

Since the late 1980's the Japanese economy has languished. The govt. of Japan has continually used a steady low grade stimulus of keeping their interest rates low. It has not helped except to keep the Japanese Yen weak.
At the start of this year Prime Minister Abe of Japan announced an effort to intentionally devalue the Yen by 100%. ie, to cut the value of a yen in half. The Japanese stock market took off as the investors thought that this would be great for Japanese exporters.
However, lately the holders of the Japanese Govt Bonds have been sellers. This has raised the prospect of higher interest rates for the debt of the Japanese Govt. Their debt to GDP is over 200%!

Japanese Debt to GDP

For many years it was possible for big money to borrow in Japan at essentially 0% and take those borrowed Yen, convert them to US dollars and buy US treasurys or US stocks with those dollars.
This has the effect of keeping the yen artificially lower and the US dollar artificially higher.
If Japan cannot keep their interest rates low they will default on their debt. If you were a holder of a Japanese Govt. bond you would be getting nervous now.
And if the massive carry trade of the last decades starts to unwind the USD would finally see the weakness that it deserves. It has been the strength of the USD over the last decades that has hollowed out the manufacturing in this country. China has also been complicit in holding the USD artificially higher. We also liked it as it kept our interest rates low.
This can reverse.
Gold will be a good place to be in this scenario.


Lately the Japanese bonds have seen selling.
And lately on the days that the Yen is higher, the US dollar is lower.

If this yen thing unravels the US dollar can go down. Dramatically.

This could be how the hyperinflationary scenario occurs. Caused not directly by Mr. Bernanke but by our cozy relationship with Japan and our preference for easy money without regard of its origin.....


No comments:

Post a Comment

All comments are appreciated as it will give me a chance to adjust my content to any real people who may be out there. Thank you. gh